We've been all around and all over the topic, but still I struggle with why so many investors so vehemently demand dividends as critical, and dismiss capital losses and gains as unimportant.

Can it be the case that dividends are perceived as moral sources of return, because the corporation chooses to pay them out, and capital value changes as immoral because somebody seems to be cheating somebody else, in line with the greater fool narrative, regardless of whether the buyer or the seller is the fool?

Thou shalt not, after all, place a stumbling block in the path of a blind man.

We've been all around and all over the topic, but still I struggle with why so many investors so vehemently demand dividends as critical, and dismiss capital losses and gains as unimportant.

Can it be the case that dividends are perceived as moral sources of return, because the corporation chooses to pay them out, and capital value changes as immoral because somebody seems to be cheating somebody else, in line with the greater fool narrative, regardless of whether the buyer or the seller is the fool?

Thou shalt not, after all, place a stumbling block in the path of a blind man.

It's one of the 613 mitzvahs.

PJW

It's not about "morality", but did you see the other recent thread about this, suggesting that investors might prefer dividends because they don't have to make a "decision" about selling to get cash out; the company is determining the date of "getting cash".

Also that they wouldn't have to worry about something like sellers' remorse if the stock price increased right after it was sold to get the cash.

Could it be that non dividend paying stock seem more speculative to the average person? That is the value of the stock is its current and eventual stream of dividends (or repurchases). When you buy a non dividend paying stock you are inherently speculating about future outcomes to a greater degree.

I think the appeal of dividends is that they remain relatively constant, no matter what stock valuations are doing. It's like how most people (I'm assuming) buy bonds for the coupon income, and not for the potential price gains due to interest rate changes. If we look at stocks as being like long-term bonds with no maturity date, a higher dividend rate effectively lowers the duration.

Also, if I owned any stock in Berkshire, I might be a little annoyed about that $100 billion in cash they're sitting on that could be distributed to the stockholders. Just because Warren Buffet can't find anything good to buy right now doesn't mean the rest of BRB's shareholders can't.

As people have said, I think there is a lot of powerful psychology at play, but I don't know if I would consider it moral or immoral.

Often a person's first experience with investing is the interest they accrue on a savings account. It's something simple, tangible, and understandable. Heck, for some people it might even remind them of being a child and being taught about money and banking for the first time.

Dividends "feel" similar to interest payments. Regardless of what happens to the price of the stock, people like to "feel" as if they are getting a fixed payout every quarter (whether or not that is actually true is a different matter). The value of owning a company that never pays out proceeds to the owners can be a little too abstract for some, not to mention the fear of mistiming the market or "losing" their investment if they have to sell their stocks in order to derive an income.

That said, the only real argument I've seen in favor of dividends is that it can sometimes signal good internal governance. The Intelligent Investor had some material on it, but the gist was that a board that commits itself to regular dividend payouts are less likely to take on too much risk (they will play it safe to make sure they have money to pay out) or play games with their accounting practices.

Last edited by Ragnoth on Wed Dec 06, 2017 12:38 am, edited 1 time in total.

---->>> Also, if I owned any stock in Berkshire, I might be a little annoyed about that $100 billion in cash they're sitting on that could be distributed to the stockholders. Just because Warren Buffet can't find anything good to buy right now doesn't mean the rest of BRB's shareholders can't. <-----

On the other hand, could it be that holding a non-dividend paying stock indicates that the shareholder has confidence in the ability of management to invest the money wisely, increase the value of the stock, and thus enable the shareholder to control when or if the taxes are paid on the accumulated uncollected "dividends" by selling shares? Personally, if I didn't have that confidence in the company's management, I wouldn't buy the stock in the first place.

That same reasoning would apply to BRK at present. The $100 billion is baked into the value of the stock, so if any shareholder wants to take a dividend, they should simply sell a few B shares and then do something better with the money than Warren, Charlie, and friends are doing with it.

Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it. - Will Rogers

A lot of the same people who bash dividends are the same people are jumping on the bandwagon of Swedroe and factor investing including the young mod who said "i love the dividend wars". I can read the undercurrent of the the statement we are rational people and they are normal people. I can tell you that I don't chase yield but I held Veipx(vanguard equity income fund)in a 401/ira from 1995 -thru Sept 2017,which likes income(dividend)stocks. I sold it due to being a expat. I can keep my account but no mutual funds. I can also tell you that VEIPX has beaten VTSMX since inception (1991) and its dam near even with VFINX since its inception. But you know what,. I really don't care but I will say it has gotten excessive, the dividend bashing that is. The same thing happen on the seeking alpha board, guess who quit posting on that board, because he didn't like it when someone disagreed with him.

1. I don't chase dividends, but I don't avoid them.
2. I don't like factor investing It took a lot of money to do all the research so they have to recoup that somehow. It called higher fees does it it pay off in the long run I don't know. I remember reading that you might lag the stock market for a while before it pays off, well that wouldn't be good for 50+ or a retiree.

We've been all around and all over the topic, but still I struggle with why so many investors so vehemently demand dividends as critical, and dismiss capital losses and gains as unimportant.

Can it be the case that dividends are perceived as moral sources of return, because the corporation chooses to pay them out, and capital value changes as immoral because somebody seems to be cheating somebody else, in line with the greater fool narrative, regardless of whether the buyer or the seller is the fool?

Thou shalt not, after all, place a stumbling block in the path of a blind man.

It's one of the 613 mitzvahs.

PJW

I don't think I have seen this on the board. They are equal parts of Total return. Their are people on this board who vehemently dislike dividends.

I don't think so... I like dividends, but I want the NAV of the fund to outpace inflation by as much as possible. Ideally even when not reinvesting dividends.

Here's another thing to consider: "Fundamental View

Modigliani and Miller’s dividend irrelevance theorem states that, ignoring taxes, informational asymmetries, and behavioral issues, a firm’s dividend payout policy should not affect its stock return. And investors should not care whether stock returns come from dividend income or capital appreciation. But in practice, dividend payments offer tangible benefits. They help investors better forecast income, and improve investor behavior such as offering a cushion to help investors stay invested through the equity market’s rough patches. Dividend payments also keep corporate managers in check. Managers are loath to cut dividends, so they may use these payments to signal their confidence in their firm’s prospects. Dividend payments encourage managers to exercise greater discipline in capital allocation decisions, because there is less money on hand to invest in low-return projects, and dividend payments discourage empire-building."

I've never heard any dividend fan argue it was a moral thing.
The usual argument is one of either "magic pockets" where they argue the cash comes out without impacting the business or that since regular dividends are to some extent stable, the stream of income is safer and price fluctuations can be ignored.

As far as reasoning for stock selection, there probably is something to the idea that a long history of maintaining and raising dividends is a 'signal' for quality companies. It's probably the most obvious and apparent 'signal' though, so it's typically priced in to the valuation and not something giving a performance edge.

"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

A lot of the same people who bash dividends are the same people are jumping on the bandwagon of Swedroe and factor investing including the young mod who said "i love the dividend wars". I can read the undercurrent of the the statement we are rational people and they are normal people. I can tell you that I don't chase yield but I held Veipx(vanguard equity income fund)in a 401/ira from 1995 -thru Sept 2017,which likes income(dividend)stocks. I sold it due to being a expat. I can keep my account but no mutual funds. I can also tell you that VEIPX has beaten VTSMX since inception (1991) and its dam near even with VFINX since its inception. But you know what,. I really don't care but I will say it has gotten excessive, the dividend bashing that is. The same thing happen on the seeking alpha board, guess who quit posting on that board, because he didn't like it when someone disagreed with him.

1. I don't chase dividends, but I don't avoid them.
2. I don't like factor investing It took a lot of money to do all the research so they have to recoup that somehow. It called higher fees does it it pay off in the long run I don't know. I remember reading that you might lag the stock market for a while before it pays off, well that wouldn't be good for 50+ or a retiree.

Yeah that was me who said "Ah, I love the dividend wars"; I thought it was clear it was meant tongue in cheek, but perhaps not clear enough.

People like Phineas J. Whoopee, livesoft, myself are not anti-dividend at all. We simply do not see any rational reason, especially in light of Nobel-prize winning work implying their irrelevance, for dividend-paying stocks to be desirable over non-dividend payers. All of my stock funds pay dividends and I happily reinvest them.

"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

We've been all around and all over the topic, but still I struggle with why so many investors so vehemently demand dividends as critical, and dismiss capital losses and gains as unimportant.

Can it be the case that dividends are perceived as moral sources of return, because the corporation chooses to pay them out, and capital value changes as immoral because somebody seems to be cheating somebody else, in line with the greater fool narrative, regardless of whether the buyer or the seller is the fool?

Thou shalt not, after all, place a stumbling block in the path of a blind man.

It's one of the 613 mitzvahs.

PJW

I don't think I have seen this on the board. They are equal parts of Total return. Their are people on this board who vehemently dislike dividends.

None of the people in the recent dividend threads dislike dividends. We dislike incorrect thinking about dividends, and people interpret this as us personally dislike dividends.

"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

Is this a good way to think about it:...?
Dividend investors essentially punish companies that pay low dividends by underweighting/excluding them.
Socially responsible investors essentially punish companies that are in certain industries by underweighting/excluding them.
Float-adjusted index investors essentially punish companies that have a lot of closely held shares by underweighting them.

(Presumably this would hold true if companies that are underweighted have higher cost of capital?)

A lot of the same people who bash dividends are the same people are jumping on the bandwagon of Swedroe and factor investing including the young mod who said "i love the dividend wars". I can read the undercurrent of the the statement we are rational people and they are normal people. I can tell you that I don't chase yield but I held Veipx(vanguard equity income fund)in a 401/ira from 1995 -thru Sept 2017,which likes income(dividend)stocks. I sold it due to being a expat. I can keep my account but no mutual funds. I can also tell you that VEIPX has beaten VTSMX since inception (1991) and its dam near even with VFINX since its inception. But you know what,. I really don't care but I will say it has gotten excessive, the dividend bashing that is. The same thing happen on the seeking alpha board, guess who quit posting on that board, because he didn't like it when someone disagreed with him.

1. I don't chase dividends, but I don't avoid them.
2. I don't like factor investing It took a lot of money to do all the research so they have to recoup that somehow. It called higher fees does it it pay off in the long run I don't know. I remember reading that you might lag the stock market for a while before it pays off, well that wouldn't be good for 50+ or a retiree.

Following up on the substantive points which I glossed over earlier, sorry:

1) VEIPX has had substantial value exposure over this time period which has been rewarded.

2) Simply because there is a lot of academic research that goes into factors does not mean implementation has to be at significantly higher cost. Vanguard's Small Value fund costs only 0.04% more than its Total Market fund. Yes, there are more expensive funds too but you don''t need that unless you want to go beyond tilting and get maximal factor exposure. For most investors they'll only need to beat the extra 0.04% cost.

"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

A lot of the same people who bash dividends are the same people are jumping on the bandwagon of Swedroe and factor investing including the young mod who said "i love the dividend wars". I can read the undercurrent of the the statement we are rational people and they are normal people. I can tell you that I don't chase yield but I held Veipx(vanguard equity income fund)in a 401/ira from 1995 -thru Sept 2017,which likes income(dividend)stocks. I sold it due to being a expat. I can keep my account but no mutual funds. I can also tell you that VEIPX has beaten VTSMX since inception (1991) and its dam near even with VFINX since its inception. But you know what,. I really don't care but I will say it has gotten excessive, the dividend bashing that is. The same thing happen on the seeking alpha board, guess who quit posting on that board, because he didn't like it when someone disagreed with him.

1. I don't chase dividends, but I don't avoid them.
2. I don't like factor investing It took a lot of money to do all the research so they have to recoup that somehow. It called higher fees does it it pay off in the long run I don't know. I remember reading that you might lag the stock market for a while before it pays off, well that wouldn't be good for 50+ or a retiree.

Following up on the substantive points which I glossed over earlier, sorry:

1) VEIPX has had substantial value exposure over this time period which has been rewarded.

2) Simply because there is a lot of academic research that goes into factors does not mean implementation has to be at significantly higher cost. Vanguard's Small Value fund costs only 0.04% more than its Total Market fund. Yes, there are more expensive funds too but you don''t need that unless you want to go beyond tilting and get maximal factor exposure. For most investors they'll only need to beat the extra 0.04% cost.

Its a dividend and income fund,this is vanguard product summary of VEIPX.

This fund is designed to provide investors with an above-average level of current income while offering exposure to the stock market. Since the fund typically invests in companies that are dedicated to consistently paying dividends, it may have a higher yield than other Vanguard stock mutual funds. The fund’s emphasis on slower-growing, higher-yielding companies can also mean that its total return may not be as strong in a significant bull market. This income-focused fund may be appropriate for investors who have a long-term investment goal and a tolerance for stock market volatility.

This is not the first someone has tried this with a dividend fund. The Dividend Aristocrats had beat the market for years and LS said oh its a value index.
Answer this, if one is 55+ should they start factor investing?

Perhaps some cap gains are seen as speculative, sort of like cap gains for collectibles. It doesn't seem like cap gains associated with increasing the intrinsic value of a company should be seen much differently than dividends.

Do you know the only thing that gives me pleasure? It's to see my dividends coming in.
- John D. Rockefeller

The above may be an extreme, but I know a lot of people like to see dividends come in. Doesn't matter if it's net worth neutral or a net negative when looking at taxes, there is still something satisfying about getting something that looks like a return from an investment. I've never heard anyone opine as to the morality of either dividends or changes in the capital valuation of a stock or mutual find, I really don't think that enters into the discussion.

We've been all around and all over the topic, but still I struggle with why so many investors so vehemently demand dividends as critical, and dismiss capital losses and gains as unimportant.

Can it be the case that dividends are perceived as moral sources of return, because the corporation chooses to pay them out, and capital value changes as immoral because somebody seems to be cheating somebody else, in line with the greater fool narrative, regardless of whether the buyer or the seller is the fool?

Thou shalt not, after all, place a stumbling block in the path of a blind man.

It's one of the 613 mitzvahs.

PJW

PJW, a point of clarification as to your intent.... Basically are you including both realized & unrealized events for both dividends & capital? You used the term "changes" on capital value -- implying unrealized. So, are you thinking of dividends as only those "expected" in the future -- that is unrealized? Trying to sharpen in my mind your view

A lot of the same people who bash dividends are the same people are jumping on the bandwagon of Swedroe and factor investing including the young mod who said "i love the dividend wars". I can read the undercurrent of the the statement we are rational people and they are normal people. I can tell you that I don't chase yield but I held Veipx(vanguard equity income fund)in a 401/ira from 1995 -thru Sept 2017,which likes income(dividend)stocks. I sold it due to being a expat. I can keep my account but no mutual funds. I can also tell you that VEIPX has beaten VTSMX since inception (1991) and its dam near even with VFINX since its inception. But you know what,. I really don't care but I will say it has gotten excessive, the dividend bashing that is. The same thing happen on the seeking alpha board, guess who quit posting on that board, because he didn't like it when someone disagreed with him.

1. I don't chase dividends, but I don't avoid them.
2. I don't like factor investing It took a lot of money to do all the research so they have to recoup that somehow. It called higher fees does it it pay off in the long run I don't know. I remember reading that you might lag the stock market for a while before it pays off, well that wouldn't be good for 50+ or a retiree.

Following up on the substantive points which I glossed over earlier, sorry:

1) VEIPX has had substantial value exposure over this time period which has been rewarded.

2) Simply because there is a lot of academic research that goes into factors does not mean implementation has to be at significantly higher cost. Vanguard's Small Value fund costs only 0.04% more than its Total Market fund. Yes, there are more expensive funds too but you don''t need that unless you want to go beyond tilting and get maximal factor exposure. For most investors they'll only need to beat the extra 0.04% cost.

Tilting to one factor exposes you to under performing the market long term which could really hurt someone late in their career or a retiree. To really factor invest you have to diversify your portfolio which most people don't wont too or have time for. Of course you can always pay a FA to do it for you. Which I believe the reason FA's are pushing factor investing. Can factor investing including FA fees really beat a low cost 3 fund portfolio?

A lot of the same people who bash dividends are the same people are jumping on the bandwagon of Swedroe and factor investing including the young mod who said "i love the dividend wars". I can read the undercurrent of the the statement we are rational people and they are normal people. I can tell you that I don't chase yield but I held Veipx(vanguard equity income fund)in a 401/ira from 1995 -thru Sept 2017,which likes income(dividend)stocks. I sold it due to being a expat. I can keep my account but no mutual funds. I can also tell you that VEIPX has beaten VTSMX since inception (1991) and its dam near even with VFINX since its inception. But you know what,. I really don't care but I will say it has gotten excessive, the dividend bashing that is. The same thing happen on the seeking alpha board, guess who quit posting on that board, because he didn't like it when someone disagreed with him.

1. I don't chase dividends, but I don't avoid them.
2. I don't like factor investing It took a lot of money to do all the research so they have to recoup that somehow. It called higher fees does it it pay off in the long run I don't know. I remember reading that you might lag the stock market for a while before it pays off, well that wouldn't be good for 50+ or a retiree.

Following up on the substantive points which I glossed over earlier, sorry:

1) VEIPX has had substantial value exposure over this time period which has been rewarded.

2) Simply because there is a lot of academic research that goes into factors does not mean implementation has to be at significantly higher cost. Vanguard's Small Value fund costs only 0.04% more than its Total Market fund. Yes, there are more expensive funds too but you don''t need that unless you want to go beyond tilting and get maximal factor exposure. For most investors they'll only need to beat the extra 0.04% cost.

Tilting to one factor exposes you to under performing the market long term which could really hurt someone late in their career or a retiree. To really factor invest you have to diversify your portfolio which most people don't wont too or have time for. Of course you can always pay a FA to do it for you. Which I believe the reason FA's are pushing factor investing. Can factor investing including FA fees really beat a low cost 3 fund portfolio?

Yes, tracking error is a difficult problem. I don't recommend everyone abandon a 3-fund portfolio. In fact I never advocate to people on bogleheads.org to switch from a 3-fund portfolio at all.

I don't know, but I don't recommend people do that, nor is it necessary to have a diversified factor-tilted portfolio. The Vanguard Small Value fund is quite diversified.

Its a dividend and income fund,this is vanguard product summary of VEIPX.

This fund is designed to provide investors with an above-average level of current income while offering exposure to the stock market. Since the fund typically invests in companies that are dedicated to consistently paying dividends, it may have a higher yield than other Vanguard stock mutual funds. The fund’s emphasis on slower-growing, higher-yielding companies can also mean that its total return may not be as strong in a significant bull market. This income-focused fund may be appropriate for investors who have a long-term investment goal and a tolerance for stock market volatility.

This is not the first someone has tried this with a dividend fund. The Dividend Aristocrats had beat the market for years and LS said oh its a value index.
Answer this, if one is 55+ should they start factor investing?

Maybe he said "oh it's a value index" because it had substantial value exposure and he was trying to explain its returns? That is what the factor model uncontroversially is, even if you disagree with those who go a step further and tilt their portfolios: it is a model for explaining portfolio returns.

"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

Also, if I owned any stock in Berkshire, I might be a little annoyed about that $100 billion in cash they're sitting on that could be distributed to the stockholders. Just because Warren Buffet can't find anything good to buy right now doesn't mean the rest of BRB's shareholders can't.

The $100B in cash is equivalent to 15% of their assets. They had even more - 16.2% of their assets in cash - in 2007. In 2009, Berkshire deployed that level of cash down to their near historic levels of keeping at least $20B on hand (to cover any insurance payout issues )by taking advantage of assets they saw as value. By early 2010, cash was down to 7.2% of assets. That patient move, and deployment at the right time has allowed Berkshire to more than double its size as a result.

As a shareholder in taxable accounts, we are certainly not annoyed that Buffet/Munger and their team are patient in deploying that cash when value appears. Time will tell, but in terms of active management - it's hard to argue with the Buffet/Munger team strategy.

Last edited by CyclingDuo on Wed Dec 06, 2017 10:40 pm, edited 1 time in total.

Its a dividend and income fund,this is vanguard product summary of VEIPX.

This fund is designed to provide investors with an above-average level of current income while offering exposure to the stock market. Since the fund typically invests in companies that are dedicated to consistently paying dividends, it may have a higher yield than other Vanguard stock mutual funds. The fund’s emphasis on slower-growing, higher-yielding companies can also mean that its total return may not be as strong in a significant bull market. This income-focused fund may be appropriate for investors who have a long-term investment goal and a tolerance for stock market volatility.

This is not the first someone has tried this with a dividend fund. The Dividend Aristocrats had beat the market for years and LS said oh its a value index.
Answer this, if one is 55+ should they start factor investing?

Dividends are correlated with value. The denominator in yield is price. In general, higher yield = lower price = higher value. This is why you see a measurement of 0.35 for loading on HmL (the Fama-French value factor) when you put VEIPX in a regression. Link to Portfolio Visualizer

There is a reason that dividend policy doesn't show up in research as an important factor. It is generally a proxy for value.

I would not advise investors who are 55+ to start factor investing, since they are probably set in their ways and unlikely to stay the course if the outcome is poor.

Its a dividend and income fund,this is vanguard product summary of VEIPX.

This fund is designed to provide investors with an above-average level of current income while offering exposure to the stock market. Since the fund typically invests in companies that are dedicated to consistently paying dividends, it may have a higher yield than other Vanguard stock mutual funds. The fund’s emphasis on slower-growing, higher-yielding companies can also mean that its total return may not be as strong in a significant bull market. This income-focused fund may be appropriate for investors who have a long-term investment goal and a tolerance for stock market volatility.

This is not the first someone has tried this with a dividend fund. The Dividend Aristocrats had beat the market for years and LS said oh its a value index.
Answer this, if one is 55+ should they start factor investing?

Dividends are correlated with value. The denominator in yield is price. In general, higher yield = lower price = higher value. This is why you see a measurement of 0.35 for loading on HmL (the Fama-French value factor) when you put VEIPX in a regression. Link to Portfolio Visualizer

There is a reason that dividend policy doesn't show up in research as an important factor. It is generally a proxy for value.

I would not advise investors who are 55+ to start factor investing, since they are probably set in their ways and unlikely to stay the course if the outcome is poor.

We've been all around and all over the topic, but still I struggle with why so many investors so vehemently demand dividends as critical, and dismiss capital losses and gains as unimportant.

Can it be the case that dividends are perceived as moral sources of return, because the corporation chooses to pay them out, and capital value changes as immoral because somebody seems to be cheating somebody else, in line with the greater fool narrative, regardless of whether the buyer or the seller is the fool?

Thou shalt not, after all, place a stumbling block in the path of a blind man.

It's one of the 613 mitzvahs.

PJW

One continues to search for explanation, but this is one I don't think I have heard before, so my answer is, no, I don't think this is it.

However, there may be a grain of truth behind a variation, which is that dividends are financially responsible and capital gains are irresponsible gambling. There is also a whiff of that in the statements that companies should return a portion of earnings in preference to making irresponsible use of the money. It also recalls a bit of this: https://www.youtube.com/watch?v=yAMRXqQXemU

There is also a whiff of that in the statements that companies should return a portion of earnings in preference to making irresponsible use of the money.

Surely the idea that most companies should, at some phases of their existence, return money to their owners is not very controversial whatever side you take in the dividend wars? A company accumulating cash in the bank should always evaluate whether they can productively use that money for R&D/expansion/strategic acquisitions/etc. If the answer is no, then presumably the company should generally return that money to the owners/investors (whether by dividends or stock buybacks). Or am I missing your point? Yes BRK doesn't choose to do that, but that is because they believe they can in fact productively use the money.

There is also a whiff of that in the statements that companies should return a portion of earnings in preference to making irresponsible use of the money.

Surely the idea that most companies should, at some phases of their existence, return money to their owners is not very controversial whatever side you take in the dividend wars? A company accumulating cash in the bank should always evaluate whether they can productively use that money for R&D/expansion/strategic acquisitions/etc. If the answer is no, then presumably the company should generally return that money to the owners/investors (whether by dividends or stock buybacks). Or am I missing your point? Yes BRK doesn't choose to do that, but that is because they believe they can in fact productively use the money.

In the context of this thread the key word I used is "irresponsible," which you have changed to "not-productive," which is an entirely different thing. Irresponsible can be construed to be immoral, but non-productive to immoral is a big stretch. Of course a company that can't use the money should return it. Whether or not an investor would want to be invested in a company that can't use the money it has is another question. This also goes back to the stock by-back debate. But all this is off-topic to the question of morality.

I do not believe your numbers are accurate. They are wrong by orders of magnitude. Google lists the market cap of Berkshire Hathaway as $484B. That $100M cash is drop in the bucket unless you and I are measuring completely different things.

We've been all around and all over the topic, but still I struggle with why so many investors so vehemently demand dividends as critical, and dismiss capital losses and gains as unimportant.

Can it be the case that dividends are perceived as moral sources of return, because the corporation chooses to pay them out, and capital value changes as immoral because somebody seems to be cheating somebody else, in line with the greater fool narrative, regardless of whether the buyer or the seller is the fool?

Thou shalt not, after all, place a stumbling block in the path of a blind man.

It's one of the 613 mitzvahs.

PJW

Howdy

Interesting question, but I don’t see an equivalence between proceeds from dividends and proceeds from a security sale.

Agree that dividends are a portion of the profits distributed to owners.

A security transaction is a contract willingly entered into by both parties, presumably with different motivations, with a neutral intermediary (a market maker or securities exchange) as a neutral facilitator. Immorality would require one of the parties taking unfair advantage of the other.

Absent insider trading, all parties have access to the same information, and the transaction is driven by their own independent motivations and judgements. This seems to be about as moral a situation as could possibly exist.

Happy trading

W B

"Through chances various, through all vicissitudes, we make our way." Virgil, The Aeneid

Receiving dividend may give a deceptive perception of receiving some value, but the asset price is reduced by the same dollar amount so that overall it is a wash. In my mind, this is a kind of forced selling whether I wanted it or not. Possibly evil.

Past result does not predict future performance. Mentioned investments may lose money. Contents are presented "AS IS" and any implied suitability for a particular purpose are disclaimed.

Whether something is moral is usually a religious issue. Some religions consider interest as being immoral but an equity stake as being moral. I don't know whether religions that consider interest as being immoral also consider dividends from preferred stock to be immoral.

I think perceptions of morality do play a role in some investors' decisions.

One point is that dividends may be seen as linked to earnings, i.e. as flowing directly from business profits, whereas capital value changes represent a mixture. One idea is that capital value is that stocks are "a share of the company" and thus their value, too, is linked to the virtuous work of the company. But unlike dividends, capital changes don't flow directly from the company itself, they flow from marketplace dynamics. A closely related view is that capital value is the discounted present value of the company's future stream of dividends; this, too, is a virtuous view based on business profits. However, the other view is that stock prices incorporate a large element of speculation in the sense of investors trying to psych out and take money away from other investors in the same stock, by betting more accurately on stock price movements.

The extreme case of the bet is the bucket shops of the early 1900s, which had stock tickers but made no stock investments at all. Patrons were simply placing bets--between each other and the bucket shop operator as bookmaker--on stock price movements. The stock market has always sought to present itself as a prudent and virtuous engine of capital allocation and to distance itself from the appearance of gambling, and exerted pressure to get the bucket shops shut down. Nevertheless, I think everyone would admit that stock price movements include an element of gambling, and not just chance, but sharp operators taking money away from patsies.

So, yes, I think at least some dividend investors feel that dividends are intrinsically less speculative than capital returns.

Of course I keep coming back to another factor, which is tradition and persistence of old ideas. In the 1920s, according to "The Great Depression: A Diary," it was fairly common for wealthy families to have their money invested in a very small number of individual dividend-paying stocks, often the stock of a big local industry, and rely on dividends for their income. Before the end of fixed commissions, and before the rise of the popularity of mutual funds, it was actually quite difficult to extract an income stream from stocks except by using dividend stocks, because the cost of transactions made it prohibitive to sell in small amounts.

We've been all around and all over the topic, but still I struggle with why so many investors so vehemently demand dividends as critical, and dismiss capital losses and gains as unimportant.

Can it be the case that dividends are perceived as moral sources of return, because the corporation chooses to pay them out, and capital value changes as immoral because somebody seems to be cheating somebody else, in line with the greater fool narrative, regardless of whether the buyer or the seller is the fool?

Thou shalt not, after all, place a stumbling block in the path of a blind man.

It's one of the 613 mitzvahs.

PJW

PJW, a point of clarification as to your intent.... Basically are you including both realized & unrealized events for both dividends & capital? You used the term "changes" on capital value -- implying unrealized. So, are you thinking of dividends as only those "expected" in the future -- that is unrealized? Trying to sharpen in my mind your view

Hi not4me, thanks for the question.

I do include realized and unrealized price changes, because not doing so is a distorted view of one's financial position, and can give rise to poor decision making. I don't know what an unrealized dividend would be. Can you be more specific?

My view isn't so much that it is a question of morality, but rather, as dbr posted upthread, I'm trying to find reasons for the vehemence of some posters' devotion to dividends, and indifference to price changes, even though mathematically dividends make no difference to one's wealth. I was thinking to myself, what other opinions are so held, and the potential moral distinction occurred to me.

Agreeing with triceratop above, I, livesoft, and many others are not against dividends. We're only against misconceptions about dividends, but there's considerable resistance to the reasoning. It's really just basic math. To the extent one is numerate, which merely means one has enough math skills to get by in day to day life, just like functional literacy doesn't require being a world-class poet, it's hard for me to fathom why the simple addition and subtraction don't land.

Not agreeing that dividends are a special type of return, but asserting rather that they're an important element of total return but no more important than any other element, is not to bash dividends.

I do not believe your numbers are accurate. They are wrong by orders of magnitude. Google lists the market cap of Berkshire Hathaway as $484B. That $100M cash is drop in the bucket unless you and I are measuring completely different things.

Alright, you had a typo there. It is over $100 billions.

Here is the amazing part though, if only he had invested this $100B in TSM, he would have "earned" extra $10 billions in less than a year!!!!

Who would be the first one to call out on him? Wouldn't it be nice if a stockholder or a reporter were to ask him on this? Or how about Bogle and Buffet conversation about losing out on $10 billion as a fiduciary?

We've been all around and all over the topic, but still I struggle with why so many investors so vehemently demand dividends as critical, and dismiss capital losses and gains as unimportant.

Can it be the case that dividends are perceived as moral sources of return, because the corporation chooses to pay them out, and capital value changes as immoral because somebody seems to be cheating somebody else, in line with the greater fool narrative, regardless of whether the buyer or the seller is the fool?

Thou shalt not, after all, place a stumbling block in the path of a blind man.

It's one of the 613 mitzvahs.

PJW

I really don't understand the question. I don't think anyone prefers dividends because they are more "moral".

I think people prefer companies pay dividends because it keeps companies more honest. The books can be cooked to make a company look more profitable. Cash-flow is harder to fake. Is that what you mean? It has nothing to do with "selling to the greater fool". It has to do with forcing the company to pay at least some of its profits every quarter.

I mean, originally, that was the entire reason you invested in a company. I would buy 10% of the local restaurant, and in return, I'd get 10% of the profits. Works the same way if you own 0.000001% of Coke. You want 0.000001% of the profits.

Sure maybe the owner of the restaurant would convince me to let him reinvest the profits so we could make more money someday. Maybe open a second place, or improve the first restaurant. But at some point, I'd want my share of the (supposedly higher) profits again.

I could sell my 10% stake, sure. Or even 1% of it to raise cash instead of asking for profit-sharing. I could just point to the books of the growing company, and say "I think my shares are worth this now", and try to find a buyer.

But the original reason to own shares of a company was to get a share of the profits - dividends. To me this still makes sense. I understand that people don't like dividends for tax reasons, but I like that a company has to strive for positive cash-flow to pay out dividends every quarter.

Last edited by HomerJ on Wed Dec 06, 2017 6:24 pm, edited 2 times in total.

Agreeing with triceratop above, I, livesoft, and many others are not against dividends. We're only against misconceptions about dividends, but there's considerable resistance to the reasoning. It's really just basic math. To the extent one is numerate, which merely means one has enough math skills to get by in day to day life, just like functional literacy doesn't require being a world-class poet, it's hard for me to fathom why the simple addition and subtraction don't land.

Not agreeing that dividends are a special type of return, but asserting rather that they're an important element of total return but no more important than any other element, is not to bash dividends.

PJW

Your intent may not be to bash dividends, but you sure are bashing anyone who likes them.

Agreeing with triceratop above, I, livesoft, and many others are not against dividends. We're only against misconceptions about dividends, but there's considerable resistance to the reasoning. It's really just basic math. To the extent one is numerate, which merely means one has enough math skills to get by in day to day life, just like functional literacy doesn't require being a world-class poet, it's hard for me to fathom why the simple addition and subtraction don't land.

Not agreeing that dividends are a special type of return, but asserting rather that they're an important element of total return but no more important than any other element, is not to bash dividends.

PJW

Your intent may not be to bash dividends, but you sure are bashing anyone who likes them.

Agreeing with triceratop above, I, livesoft, and many others are not against dividends. We're only against misconceptions about dividends, but there's considerable resistance to the reasoning. It's really just basic math. To the extent one is numerate, which merely means one has enough math skills to get by in day to day life, just like functional literacy doesn't require being a world-class poet, it's hard for me to fathom why the simple addition and subtraction don't land.

Perhaps you're being generous. If someone doesn't understand how the larger system works, speaking to the math of a particular component will do little good.

I do not believe your numbers are accurate. They are wrong by orders of magnitude. Google lists the market cap of Berkshire Hathaway as $484B. That $100M cash is drop in the bucket unless you and I are measuring completely different things.

Yup, silly typo. B not M.

Cash is measured as a percentage of assets on the balance sheet, not by the market cap.

The $100B in cash is equivalent to 15% of their assets. They had even more - 16.2% of their assets in cash - in 2007. In 2009, Berkshire deployed that level of cash down to their near historic levels of keeping at least $20B on hand (to cover any insurance payout issues )by taking advantage of assets they saw as value. By early 2010, cash was down to 7.2% of assets. That patient move, and deployment at the right time has allowed Berkshire to more than double its size as a result.

As a shareholder in taxable accounts, we are certainly not annoyed that Buffet/Munger and their team are patient in deploying that cash when value appears. Time will tell, but in terms of active management - it's hard to argue with the Buffet/Munger team strategy.

True, but the S&P 500 has also more than doubled in that time frame. (Looking at PV data, it seems like BRK has about broken even with the S&P over the last 15-ish years--a lot depends on exactly where you start the backtest.)

I'm not denying Warren Buffet is really good at his job, but I'd be curious to see an apples-to-apples comparison of Buffet vs. the S&P that accounts for BRK's leverage, etc.

Homer made the point I was trying to make better than I did. Basically the only reason that we hold stocks at all for long term investment is that we think it entitles us to a share of the companies profit at some point. Its much more abstract to hold companies that are reinvesting to grow faster and eventually pay more in dividends (or buys back more shares) than companies that currently pay dividends or buys back shares. I don't tilt to dividends except incidentally through value funds but preferring stocks that pay dividends seems perfectly reasonable to me.

Since you used the word moral...some people still tie religious biblical interpretation to "money". One interpretation is that you have to be a good steward of the gifts" from God. Part of which is to say you cannot divest yourself of a "gift" from god, it is a two edge sword. In other words buying and selling of business assets is not considered good stewardship but maintaining a business asset is(this is all up to biblical interpretation). In other words acquiring land and taking an annual yield in the form of crops, milk, or animal protein is stewardship but buying the land and then selling it for a profit is not good stewardship and for some consider avoiding the "duty" (a two edged sword) of a gift from the creator(this is why at least two large chains are so open in their religious affiliation. They feel they cannot divest themselves of their business and donate to charity so much as they have to continue to operate the business and operate it in a charitable manner as an on going concern). In terms of stocks, taking a dividend is the equivalent of milking a cow, or harvesting wheat, or slaughtering a fatted calf, which is differentiated from selling off a piece of land which is, once again, considered divesting yourself of a gift that was given to you with the binding entanglement of stewardship. I hope that helps.

There is also a whiff of that in the statements that companies should return a portion of earnings in preference to making irresponsible use of the money.

Surely the idea that most companies should, at some phases of their existence, return money to their owners is not very controversial whatever side you take in the dividend wars? A company accumulating cash in the bank should always evaluate whether they can productively use that money for R&D/expansion/strategic acquisitions/etc. If the answer is no, then presumably the company should generally return that money to the owners/investors (whether by dividends or stock buybacks). Or am I missing your point? Yes BRK doesn't choose to do that, but that is because they believe they can in fact productively use the money.

The idea is as controversial as the notion that sovereign nations should at some point repay the entirety of their debt.

For an excellent analysis of dividends, among other investment topics, see The Essays of Warren Buffett: Lessons for Corporate America, excerpts from Buffett's annual letters to Berkshire Hathaway' shareholders.

As to dividends, Buffett emphasizes that "unrestricted earnings" (earnings not needed to strengthen or main a company's competitive position) should be retained, rather than paid out as dividends, "only if the capital retained produces incremental earnings equal to, or above, those generally available to investors." In other words, dividends should be paid if the funds thus made available to shareholders would enable them to invest more profitably elsewhere. If no such equal or better alternative investment is generally available, long term investors, like the vast majority of Berkshire's shareholders, are likely to be best served by retention and deployment of unrestricted earnings by management.